Navigating the sale of an aviation business involves a multitude of considerations, especially when deciphering a buyer's true intent in the aviation sector. The Letter of Intent (LOI) serves as the initial handshake, outlining a prospective buyer's desire to acquire the seller's aviation business under specific terms. However, this milestone isn't the culmination but rather the commencement of a comprehensive journey.
Understanding LOI Significance:
An LOI marks a pivotal moment, signifying alignment on fundamental terms subject to further due diligence. Although often non-binding on substantive matters like pricing and transaction structure, it lays the groundwork for the transaction. Key elements encompass access to sensitive data, collaborative expectations, exclusivity clauses, confidentiality agreements, and financial arrangements.
Unique Challenges in Aviation Transactions:
Aviation sellers must manage expectations, recognizing that buyers may withdraw even after extensive due diligence. Such situations can pose unanticipated hurdles, especially if the buyer is a direct competitor. Despite well-crafted non-disclosure agreements, strategic buyers might prioritize bolstering their own ventures, impacting the seller's expectations.
7 Key Insights in Assessing an LOI:
1. Scrutinizing Offers: Sellers should carefully evaluate offers, avoiding those that seem overly advantageous. Unrealistically high considerations may lead to renegotiations or prolonged financing quests, resulting in exclusivity periods that remove the seller's business from the market.
2. Financial Understanding: Grasping the buyer's financing strategy is crucial. Whether cash at closing or bank debt, sellers should seek evidence of financing commitment early in the process to avoid extended exclusivity without financial assurances.
3. Compensation Structure: Assessing the compensation method is vital. Does the deal entail cash at closing? What indemnification provisions are in place? Is rollover equity or the buyer's stock part of the transaction?
4. Debt and Working Capital: Sellers need clarity on whether the transaction is cash-free/debt-free. Additionally, attention to working capital adjustments is crucial as they impact the valuation's income stream.
5. Post-Closing Commitments: Sellers must ascertain any post-closing obligations, such as continued involvement in the business and compensation duration.
6. Non-Competition Aspects: Understanding the constraints of a non-compete clause is essential. Geographic limitations, business type restrictions, and the duration of effectiveness require thorough consideration.
7. LOI: A Commencement, not a Conclusion: Sellers should perceive the LOI as the transaction's initial stage. Processes like due diligence, contract drafting, and financing follow, shaped by the terms outlined in the LOI.
7 Ways to Assess a Buyer's LOI
Beyond understanding the significance of the LOI, sellers must delve deeper into evaluating offers in business transactions. Here are additional facets to consider:
1. Unrealistic Offers: An enticing offer might not always materialize as expected, leading to redefined terms or a failed transaction.
2. Buyer's Financial Strategy: Understanding how the buyer intends to finance the deal is vital to ascertain its feasibility and determine potential hurdles.
3. Working Capital Adjustments: Clarity on what constitutes 'normal' working capital and its impact on cash flows helps align expectations.
4. Buyer's Competing Ventures: Sellers should anticipate scenarios where the buyer opts to invest in their existing business instead of paying an acquisition premium, affecting the proposed purchase price.
5. Deal Structure: Distinguishing between stock and asset deals is essential, as they have different tax implications and affect the seller differently.
6. Seller's Continued Involvement: Post-closing involvement expectations and compensation should be clearly defined to avoid any misalignment.
7. Non-compete Requirements: Evaluating the constraints and duration of non-compete agreements is crucial for future business engagements.
Brookfield bridges aviation sellers and buyers through seasoned experts versed in aviation intricacies. Leveraging vast industry knowledge, we meticulously assess buyer's intent, aligning offers with realistic expectations and industry standards.
Our experts facilitate constructive interactions, decode complex financial structures, and navigate due diligence, empowering sellers to make informed decisions.
Our commitment extends beyond LOI evaluation, guiding sellers through the transaction process, and ensuring risk mitigation and favorable terms. Our vision revolves around empowering sellers to navigate aviation transactions seamlessly, relying on expertise to achieve optimal outcomes in this intricate landscape.